A group of vulture funds led by Aurelius Capital and Silver Point Capital from the US are believed to have built up blocking stakes in two tranches of the Co-operative Bank’s £1.3bn of subordinated debt.
Bondholders are key to the Co-op’s rescue plan because the group does not have sufficient funds to fill a £1.5bn capital shortfall at the bank identified by the regulator.
Instead, the group will inject £1bn and bondholders will be asked to make up the remaining £500m by taking losses on the £1.3bn of debt.
However, the hedge fund consortium is thought to have taken a large enough position to block the deal on two tranches of the debt worth a total of £300m. As a result, the Co-op Group might have to find another £100m to get the rescue through.
The hedge funds are playing a high-risk game because the Co-op claims it cannot put any more money into the bank without running into problems with its own lending syndicate. If it fails to raise the full £1.5bn, the bank may be put into “resolution” and wound down, which would see bondholders lose significantly more than £500m.
Neither side expects such an extreme outcome, though. Co-op sources believe the bondholders are holding out for better terms, including a larger equity stake in the bank.